Outlook for U.S. wheat prices bearish through 2016-17, but then?

As winter approaches, wheat prices remained under pressure from ample U.S. and record world wheat supplies. Wheat futures set new contract and multi-year lows on Aug. 31 and have failed to make a convincing breakout to the upside since. Wheat prices may continue to hover near the lowest levels in a decade into 2017, barring a currently unexpected severe adverse weather event in the United States or another major wheat-producing country, according to analysts interviewed by Milling & Baking News, a sister publication of World Grain. At the same time, the outlook for 2017-18 is not as bearish as that for the remainder of the current year, which bakers may want to consider when deciding how far forward they may want to book flour in the coming weeks, the analysts observed.

Kansas City and Chicago wheat futures have remained range-bound since setting multi-year lows on Aug. 31. The K.C. March future has traded within a range from the contract low of $4.11½ a bushel and a high of $4.45¼ registered on Oct. 20. The Nov. 15 close was $4.25½ a bushel. The Chicago March future has traded within a range between the Aug. 31 low of $4.10¼ and the recent high (Oct. 14) of $4.45¾. The Nov. 15 close was $4.18¾. The Minneapolis March future outperformed the Kansas City and Chicago March contracts advancing 49¾c from the Aug. 31 low of $4.90 a bushel to a high of $5.30¾ on Oct. 14 before trending lower and closing on Nov. 15 at $5.18.

The recent relative strength in Minneapolis spring wheat futures versus the K.C. and Chicago contracts reflected a market response to weather damage to a portion of the Canadian spring wheat crop that, along with quality problems in wheat crops in some other major exporting countries, may increase world demand for high-quality and higher-protein spring wheat from the United States. Such demand would come at a time when among the U.S. wheat classes only hard red spring wheat was forecast to end the 2016-17 crop year with lower stocks than was the case in 2015-16. While the spread between K.C. and Chicago wheat futures has been narrow, Minneapolis futures have been trading from 90c to more than a dollar a bushel higher than the winter wheat contracts.

Bearing down on all wheat futures was the overwhelmingly bearish wheat supply-and-demand outlook for the remainder of 2016-17. The U.S. Department of Agriculture on Nov. 9 raised its forecast for the carryover of wheat in the United States on June 1, 2017, to 1.143 billion bushels, up 5 million bushels from the October projection and up 17% from 976 million bushels in 2016. The 2017 wheat carryover was forecast to be the largest since 1.261 billion bushels in 1988. Record yields in 2016 resulted in an all-wheat crop of 2.310 billion bushels, the largest since 2.512 billion bushels in 2008.

The USDA forecast 2016-17 world wheat ending stocks at a record 249.23 million tonnes, up 0.86 million tonnes from the October projection and up 8.2 million tonnes, or 3%, from 241.03 million tonnes in 2015-16, the current record. World wheat production in 2016-17 was forecast at a record 744.72 million tonnes, up 0.28 million tonnes from the October projection and up 9.24 million tonnes, or 1%, from 735.48 million tonnes in 2015-16, the current record outturn.

And the 2016-17 bounty showed signs of continuing with U.S. and world producers harvesting record corn and soybean crops.

Given the weight of this unprecedented grain supply, Steve Freed, vice-president, ADM Investor Services, and Paul Meyers, vice-president, commodity analysis, Foresight Commodity Services, Inc., Naperville, Illinois, U.S., were asked what it would take to prod wheat futures to break out of their current ranges.

“I’m a little surprised the Kansas City market isn’t trying to find a bid given the dryness in the southern Plains,” Freed said. “Historically, farmers would much rather have rain in April than in November, but you need some rain to get the crop out of the ground.”

Freed said it seemed the market doesn’t yet care much about the dryness, although the current dry and abnormally warm weather pattern in the Southwest may continue through the winter.

“Given no relief in sight, you’d expect some kind of a weather premium, but so far, it’s been a nonevent,” Freed said.

Meyers also pointed to the expanding area of moderate drought across southwestern Kansas and to even drier conditions across parts of the Southeast. In southwest Kansas, soil moisture was being depleted, although at a state level, topsoil moisture as of Nov. 13 still was rated 63% adequate to surplus (57% a year earlier), and subsoil moisture was 71% adequate to surplus (54%).

Meyers pointed out Kansas crop condition ratings as of Nov. 13 remained above a year earlier. The USDA rated the Kansas crop at 56% good to excellent as of Nov. 13, unchanged from the previous week and compared with 46% a year ago. Also, it was pointed out the 2016 Kansas crop, even with relatively poor condition ratings entering last winter, saw record yields at harvest because of outstanding spring weather.

Other weather developments also bear watching, Meyers said.

“Recent observations from Australia suggest 1 million to 2 million tonnes of wheat production may have been lost because of recent frost,” he noted.

These reports of damage were yet to be reflected in the USDA forecast for the Australian crop, which remained at 28.3 million tonnes, nearly 4 million tonnes higher than the country’s 2015-16 outturn. Meyers pointed out even if 2 million tonnes in production were to be lost to Australia, Southern Hemisphere wheat production in 2016-17 still would be higher than last year, providing additional competition for U.S. wheat in export markets.

In its November World Agricultural Supply and Demand Estimates report, the USDA left unchanged its forecast for U.S. wheat exports in 2016-17 at 975 million bushels, which compared with 775 million bushels in 2015-16 and 864 million bus in 2014-15. Both Meyers and Freed indicated U.S. exports may fall a bit short of the forecast, perhaps by as much as 25 million bushels.

Freed and Meyers also pointed to the advance in the value of the dollar in the wake of the election of Donald J. Trump as 45th president of the United States as constraining wheat export prospects in the near term. The dollar’s advance was related to the rally in equity markets, which was attributed to the end of a contentious U.S. general election, President-elect Trump’s suggestion a priority of the new administration will be rebuilding infrastructure, which may stimulate the economy, and ideas that the Federal Reserve will raise interest rates in the United States, making investment in the dollar more attractive.

The stronger dollar, though, made U.S. commodities more expensive to overseas buyers, which pressured wheat futures. Before the dollar rally, U.S. wheat was becoming more competitive in world markets, and only lower wheat futures could offset the effect of the dollar’s rise.

It was the outlook for 2017-18 that provided the best opportunity for wheat prices to rally, Meyers and Freed agreed. Both expected U.S. wheat production in 2017 to fall because of reduced plantings.

The area planted to winter wheat in the United States for harvest in 2016 was 36.1 million acres. Meyers said winter wheat plantings may have dropped 2% to 3% this fall from a year ago. The greatest decrease in winter wheat area was expected in the hard red winter wheat belt, Meyers said, because of slumping Kansas City wheat futures and cash wheat bids to the farmer in the country about $1 a bu below the K.C. December future.

Freed noted some crop forecasters suggested all-wheat planted area for 2017 may drop to around 48.5 million acres compared with 50.1 million acres in 2016, a decline of about 3%.

Acreage reductions of this size should translate to a smaller U.S. crop in 2017.

“Next year, the U.S. will produce less wheat,” Meyers said. “There may be acreage cutbacks in other regions as well. And we’re not likely to have a fifth consecutive year of record world wheat production.”

Meyers said wheat futures may drop modestly in the near term, but most bearish factors for 2016-17 have been priced into the market.

“Going forward, the supply-and-demand situation for 2017-18 will not be as bearish as in 2016-17,” Meyers said.

Meyers said wheat futures may continue to trade sideways for the next couple of months, although a lot depends on the condition of the winter wheat as it enters dormancy. He suggested in the first quarter of 2017, the average trade in the Kansas City March future may be between $4.25 and $4.40 a bushel. The Chicago March may trade 5c below K.C. the K.C. future, and the Minneapolis March may trade 90@100c above.

“When you have such a carry in the marketplace, you have to say, if nearby Chicago wheat is worth $3.95 a bushel, then next year’s July wheat at $4.44 a bushel is just too high,” Freed said. “Then you look at Kansas City wheat at $4.04 for nearby compared with July 2017 wheat at $4.46, and again, $4.46 just seems too high. The USDA said they thought the average farm price (in 2016-17) was going to be about $3.70 a bushel. Last year, it was $4.89. So, they’re still looking for a trend of lower prices.”

Minneapolis futures presented a different story, though, as carrying charges were much more narrow than in the other markets.

“So we’re seeing more potential for downside risk in Chicago and Kansas City, assuming weather is normal, than you do in Minneapolis,” Freed said.

Bakers’ flour coverage for the fourth quarter was nearly completed, and January-March flour coverage was at about 30%. These estimates reflected completed flour bookings. Bakers’ commitments to contracts — reflecting completed bookings and component positions, primarily futures, committing bakers to contracts with particular suppliers — were even more extensive.

While many bakers have extended their futures coverage beyond March, others remained reluctant to “buy into the carry” and held back. With flour prices at the lowest levels in years, bakers were expected to book at their own pace, unless weather jars the market and requires a more aggressive posture.

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